Good afternoon, Mr. Chair and distinguished members of the committee.
Thank you for the invitation to appear before this committee. My colleague Don Coletti, who is an advisor to the Governor, is joining me today.
We are pleased to be able to contribute to your timely study on the Canadian real estate market. The Bank of Canada has a mandate to keep inflation low, stable and predictable. Given the importance of a well-functioning financial system in achieving our inflation goal, we provide our assessment of the stability of the Canadian financial system twice a year through our Financial System Review. Let me thus focus my remarks on financial stability.
Our assessment starts by identifying the financial system's most significant vulnerabilities; this is important since financial vulnerabilities can help propagate and amplify shocks to the economy, leading, among other things, to larger deviations of inflation from our 2% target.
Over the past few years, we've highlighted two key vulnerabilities that are relevant to your study: high levels of household indebtedness and housing market imbalances. These two vulnerabilities clearly interact with one another, as households borrow more to buy more expensive homes.
Let me briefly discuss these two vulnerabilities in turn.
The first one, indebtedness, is well known. The ratio of debt to disposable income in Canada is now approaching 170%. This ratio has been rising steadily since the early 2000s. Additionally, the aggregate number masks worrisome patterns regarding how this debt is distributed. For example, our analysis shows that debt has become more concentrated over time in households with higher levels of indebtedness. Compared with their less indebted counterparts, these households tend to be younger and have lower incomes.
The second vulnerability concerns house prices, which now stand at a record of almost six times the average household income on a national basis. What's more concerning here are the imbalances in some cities, most notably Toronto and Vancouver. The price increases we've seen in those cities have been caused by a number of factors, ranging from demographics to low interest rates to constraints on land use. We've also highlighted our concern that expectations of future price growth may be a contributing factor. Because these expectations can change rapidly, the imbalances that have emerged make it more likely that shocks to the economy could cause a drop in prices.
In light of these vulnerabilities, the most important risk to the financial system remains a large and persistent rise in the unemployment rate across the country, which creates both financial stress for many highly indebted households and a correction in house prices. In this scenario, households significantly cut back their consumption spending, while a rise in defaults and a decline in collateral values exert stress on lenders and mortgage insurers. Although we see a low probability of this risk materializing, its impact would be substantial if it were to occur. This is why we judge this risk to be elevated.
That said, I hasten to add that we've concluded model simulations to analyze the effects of such a shock and found that the buffers in the Canadian financial system would be sufficient to absorb its impact. While there would be stress, the financial system would remain resilient.
As you know, the federal government made important changes to housing finance rules last fall. These changes should reduce the rise in highly indebted households over time by ensuring that borrowers are more resilient to potential future headwinds. We are not expecting the regulatory measures to lessen this vulnerability overnight, because it will take time for the number of highly indebted households to decline significantly.
It's also worth emphasizing that under the new mortgage finance rules, the ability of all insured borrowers to make debt service payments must now be assessed using an interest rate that is higher than the prevailing market rate. As well, applicants must show they can cover the costs associated with servicing not only their mortgage but also their total consumer debt.
We expect this more stringent test will reduce vulnerabilities not only in Toronto and Vancouver, but also in cities where house prices are not as high relative to incomes, such as Montreal, Halifax and here in the Ottawa-Gatineau region.
The last point I'll make is that the Bank of Canada can best contribute to long-term financial stability by keeping inflation low, stable and predictable.
To achieve our inflation mandate, we cut interest rates after the financial crisis and have done so twice since 2014, after oil prices collapsed.
Our actions supported income growth and the economic recovery we've seen, helping mitigate households' financial stress along the way. This policy, coupled with other macroprudential tools aimed directly at financial vulnerabilities, is helping to preserve the stability of our financial system.
Thank you for your attention. We will be happy to answer your questions.
Thank you, Mr. Chair. It's a pleasure to be here.
As you know, our president and CEO, Evan Siddall was scheduled to meet with the committee today. Unfortunately, Mr. Siddall cannot be here, but he asked that I deliver these remarks on his behalf.
We welcome this opportunity to contribute to the committee's study of issues surrounding the residential real estate market and home ownership.
As Canada's authority on housing, CMHC continuously monitors housing markets and undertakes research and analysis to support informed policy and decision making. This is key to fulfilling our legislative mandate to facilitate access to housing and contribute to the stability of Canada's financial system.
A robust statistical modelling exercise undertaken last year by our housing market analysis team confirms that the most important factors accounting for house price increases over the long term are economic in nature: rising disposable incomes, increased inflows of people, and lower mortgage rates.
Three additional factors are contributing to the shorter term price dynamics that are currently being felt in certain urban centres, notably Toronto and Vancouver. These include financial acceleration effects from both domestic and foreign investments and the implications of rising income and wealth inequalities. In regard to the latter, people with higher incomes can get larger mortgages and buy bigger, more luxurious homes. Coincident with increased income inequality in Toronto and Vancouver, price increases in these cities in recent years have been led by more expensive single detached homes.
Perhaps an even larger factor impacting house prices in some markets is the weak and lagging supply response. Geographic constraints in Toronto and Vancouver, as well as municipal land use regulation fees and extended approval processes, are limiting new construction and pushing home prices higher. It is clear that more supply would moderate price increases and alleviate the challenge this represents to home ownership.
At 69%, Canada's home ownership rate is among the highest in the world, and that includes countries such as the U.S., the U.K., France, Australia, and many other OECD countries. Although more work needs to be done, research from other countries supports the premise that home ownership is associated with positive social and economic outcomes, such as improved education results, greater community engagement, and wealth accumulation. I should caution, however, that much of the research predates the last financial crisis.
There is growing concern that escalating prices are putting home ownership out of reach for many Canadians, including young, middle-income families. This has potential implications, not only for these families, but also for the wider economy. For example, high housing costs may provide an economic incentive for workers to resist moving from less productive economies to more productive ones. This is a very human reaction that results in a significant net loss to the country as a whole.
CMHC has a mandate to facilitate access to housing, including by supporting the efficient functioning of the housing finance market to enable home ownership, but also to contribute to the stability of the financial system. In pursuing these objectives, we must be careful not to facilitate Canadians' buying homes they may not be able to afford.
Household debt is at a record level in Canada at 165% of disposable income, and residential mortgages account for about 72% of consumer debt. Our colleagues at the Bank of Canada continue to flag this as a top vulnerability to financial stability in Canada.
Concerns have been voiced about the ability of first-time homebuyers to buy homes. Support should not be unlimited, however. Ample support exists for first-time homebuyers, including the federal government's homebuyers' plan, federally guaranteed mortgage insurance itself, and various provincial measures. Too much encouragement to buy a home exposes vulnerable people to excessive financial risk, and pushes prices higher where supply inelasticity exists, making sellers better off, but not buyers, and jeopardizes our economic prospects. The last thing we want is for somebody to lose their home.
CMHC's most recent housing market assessment report, released just days ago, confirms that there is good reason for concern about housing market conditions. It indicates strong evidence of problematic housing market conditions in Canada as a whole. This was first noted in our fall 2016 housing market assessment. Since then, conditions have worsened in Victoria, although evidence shows problematic conditions have eased in Calgary.
We have, therefore, supported the Minister of Finance's efforts to rein in excessive housing market activities in our role as the government's policy adviser on housing.
Last fall, the Government of Canada tightened the eligibility rules for insured mortgages to reinforce the Canadian housing finance system and to help protect the long-term financial security of borrowers and all Canadians.
These changes addressed rather a chorus of commentary, from the IMF and OECD among others, that the federal government carried too much exposure in housing markets.
Notably, a “stress test” has been introduced for all insured mortgages. The Bank of Canada posted rate, which is typically higher than contract rates, must now be used to underwrite all guaranteed mortgages. This buffer will help offset the highly stimulative effect of low interest rates.
Secondly, while lenders are free to offer more flexible terms for uninsured mortgages, government-backed mortgage insurance will no longer be available for any mortgages on properties valued above $1 million or with amortizations beyond 25 years.
We expect these macroprudential policy changes will moderate demand for housing, which will have the effect of limiting price increases, making houses more affordable, and support sustainable economic growth.
We have observed modest reductions in activity, but it is too early to say whether the changes are in fact achieving these objectives. The spring season, which is typically very busy for housing markets, will help confirm any long-term trends.
Finance Minister Morneau has also initiated a public consultation on lender risk sharing for government-backed insured mortgages, which wraps up at the end of February. We look forward to exploring this idea, which we believe would result in a more resilient housing system by more fully involving lender in risk management and adjudication.
Currently, regulated lenders do not have to hold capital for risks associated with guaranteed mortgages. We are concerned about the misalignment of interests that could result, even to the extent of moral hazard in such cases.
Lender risk sharing aims to rebalance risk in the housing finance system by requiring lenders to bear a modest portion of loan losses on any insured mortgage that defaults. This will ensure that the incentives of all parties to an insured mortgage loan are aligned toward managing housing risks and further strengthening Canada's housing market and financial systems.
At CMHC, we estimate that a modest level of lender risk sharing could increase the typical five-year fixed rate mortgage by 10 to 40 basis points, depending on the default risk of a particular mortgage.
As a crown corporation with a mandate to contribute to Canada's financial stability, CMHC must be a leader in housing risk management. We have significantly strengthened our risk management policies and practices recently, and we will continue to do so.
In the interest of accountability, we have been deliberately more transparent and open in our reporting, analyses, and public presence. We are therefore grateful for the opportunity to be here and to support your work.
Thank you, on behalf of the superintendent and the rest of my colleagues at OSFI, for the invitation to be here today.
The health of the housing sector is important to the Canadian economy and to the health of Canada's financial sector, and we welcome the opportunity to participate in the committee's deliberations.
OSFI is Canada's prudential regulator and supervisor of federally regulated financial institutions. Our oversight includes banks, insurance and trust companies, and private pension plans. Approximately 80% of the mortgages issued in Canada are held by financial institutions under OSFI's supervision, and residential mortgages represent almost 30% of the assets held by the banks we supervise. Our responsibilities also include the monitoring and examination of the three mortgage insurers operating in Canada, including my colleagues from CMHC. Accordingly, OSFI keeps a close eye on the risks impacting the mortgage market, such as underwriting and risk management practices of lenders and mortgage insurers, as well as the broader risks, including economic conditions and the interest rate environment. OSFI's mandate is to protect the depositors, policyholders, and creditors of the institutions we supervise, while allowing them to compete and take reasonable risks.
At a policy level, OSFI fulfills this mandate through two key activities: setting principles and standards for sound risk management in financial institutions in the form of guidelines and other policy directives, and setting the minimum requirements for the quantity and quality of capital that financial institutions must hold.
OSFI's expectations with respect to risk management practices in the residential mortgage market are made clear in two separate policy guidelines: B-20, which sets out the principles for mortgage lenders, and B-21, which sets out the principles for mortgage insurers.
Minimum capital requirements for banks and insurers are evaluated by OSFI on an ongoing basis and are designed to ensure that lenders and insurers have sufficient capacity to absorb severe but plausible losses.
At an operational level, OSFI fulfills its mandate through a rigorous supervisory regime that combines continual monitoring and an examination process that ensures financial institutions comply with our guidelines and continue to hold capital and liquidity given their respective risk profiles.
Like all financial regulators, OSFI has worked hard in recent years to incorporate the lessons of the financial crisis in our policies and practices. Key among these lessons was that the vulnerabilities that build up in the residential mortgage markets, such as stretched housing valuations and high rates of consumer debt, can lead to financial instability and sharp contractions in economic activity. Deteriorating lending standards of lenders and insurers, and financing structures with misaligned incentives, can fuel these vulnerabilities.
Since the financial crisis, OSFI has made a range of adjustments to both our policy guidelines and our capital requirements for mortgage lenders and insurers. These adjustments reflect the lessons we've learned and the vulnerabilities evident in the Canadian market. Recent examples of these changes include requirements for certain mortgage lenders to hold additional capital for mortgages that originated in markets where housing price increases are significantly outpacing income levels. We've also recently adjusted the formulae mortgage insurers must use to calculate the capital, to incorporate a wider set of risk indicators.
In addition to policy changes, OSFI has increased its supervisory intensity of mortgage lending and tightened our expectations around mortgage underwriting practices. Most recently, just this past summer, OSFI issued a letter to the industry reminding them not to be overreliant on the collateral value of housing assets and to be diligent in assessing a borrower's willingness and ability to make payments on a timely basis. This letter was followed up by a series of targeted examinations.
These are just a few examples of OSFI's work with regulated entities designed to promote prudent mortgage lending and insurance practices, thereby increasing the resilience of Canadian financial institutions to adverse shocks and ensuring they are prepared for the unexpected.
Before I conclude, I would add that while OSFI is an independent regulatory agency, it does not operate in isolation. At the federal level, OSFI co-operates with key agencies, notably the Department of Finance, my colleagues here from the Bank of Canada, the Financial Consumer Agency, and the Canada Deposit Insurance Corporation. Although each of us has a distinct mandate, role, and focus, we all work in coordination to maintain a strong and stable financial system, a system in which Canadians can place their trust.
Thank you for your time. I look forward to your questions.
It's good to be back at work in Parliament again. Let me start with a little dialogue with everyone. I've taken the time to read the FSR report of December and June, and the comments of Mr. Siddall from CMHC from Vancouver and from London, and the CMHA report. I take an interest in OSFI's work all the time, because it was part of my past life.
Mr. Rudin's speech on sound residential mortgage underwriting in a changing environment, delivered on November 28, 2016, plus his remarks on bank capital, was interesting, along with all of our government's actions with regard to the housing market.
I look at this and I ask myself what worries me. If I can use a term from a book, where is the black swan? Is there one out there, and can we even identify it? Usually you can't until it's passed. What may trigger some sort of event in our housing market?
I look at what happened in the United States. We don't have NINJA loans; we don't have adjustable-rate mortgages; we don't have the large subprime market that they had. Our underwriting standards are top-notch, but we have household indebtedness. We have housing market imbalances due to the supply side, and we have a lot of regulatory change that is happening. So when I look at it, I ask myself what event out there may cause trouble for us and what exogenous event even more so. It could be a regulatory event in consequence of a regulatory action, and it's the exogenous side that scares me.
The simplest one that comes to mind is employment, or some sort of employment shock to the system, and you will see it in auto delinquencies or housing delinquencies. But we know that Canadians pay their bills. We are the best consumers in the world, basically. You can look at the data. I saw it in my past life and I follow it currently.
I look at the Canadian housing market, and we are regional markets. Measures that are introduced nationally may have unintended consequences in some markets. Toronto and Winnipeg are two different housing markets. I would argue that the housing markets in Toronto and Vancouver are like those in London and New York City 20 to 30 years ago, in which a million-dollar purchase price, which is not covered by an insured loan anymore, is just a million-dollar purchase price. The dream of having a backyard isn't there. You have to move to the suburbs.
A lot of the actions our government has taken pertain strictly to the insured market, which is 20% of the mortgage market, while 80% of the mortgage market is conventional. Please correct me if I'm wrong, but 20% is insured and 80% is conventional, uninsured. The housing price equation is not being driven by the first-time buyer; it's being driven by the conventional buyer, i.e., the low-ratio buyer.
In terms of the housing price equation, to me it's the housing market imbalances that are of greater concern, the supply factor, not the first-time buyer. That's one thing. My question, in a roundabout way, is what concerns us? I understand that financial stability is important. Since 2008 we've introduced a ton of measures—B-20 and B-21 and so forth. The new higher CMHC premiums for mortgage insurance came out earlier this week.
Mr. Tremblay, sir, risk sharing is a bad idea. It's going to result, in some mortgage markets in Canada, in consumers being dinged 30 to 50 basis points, especially in areas where economic growth is not as buoyant as in other areas.
I'm going to stop there. There are three minutes for remarks. I can go on for an hour on this thing, as you can tell.
I'm going to leave it there, but what black swan should we be worried about that is concerning for the Canadian housing market? Leave yourselves 45 seconds each.
Thank you all for being here. I guess following up a little bit, it's not really a surprise that I somewhat disagree with my colleague. In terms of the targeted approach versus the one size fits all, I somewhat see the changes in borrowing to be a more targeted approach because—and correct me if I'm wrong—if I'm understanding it, it's all relative. It doesn't matter about the housing market or the price of a house in a relative market; it's your indebtedness level. So if you're in debt in P.E.I., or you're buying a house in Toronto, but you have low debt, that's where you're going to come into issue. If you don't have high indebtedness, then it doesn't matter the market you're in, as you'll be able to deal with this. If your debt is too high to your income, then it's a big risk, and the government is concerned about making sure that the system doesn't crash, essentially, or that you can still pay your bills based on your relative income.
Where I see a larger concern is when you see.... With all due respect, I have no qualms about the fact that, for example, when you see in B.C. or in Vancouver these approaches by those governments, I'm sure it's incredibly important or what's needed. But for me, coming from the GTA, when you deal with something in one place, it just pops up worse in the other. It's still early days, but from what we're seeing in the market in Vancouver, there seems to be some indication or acknowledgement that some of the recent changes to address foreign investment are working. In Toronto in the GTA, where I'm from, it is actually increasing.
So how do we deal with creating a system that is fair and controlled without having other individual or additional markets also getting involved or pressured? It's somewhat of a very broad statement, but I think a more appropriate question would be in and around where Mr. Grewal's questions were going. If you're not tracking foreign investment, for example cash, then you're not really highlighting some of the risks. There are areas within the GTA that, if the Vancouver market has now shifted, for example, and we're not tracking this foreign investment in cash payments, we are not really assessing the associated risks that are trickling elsewhere, the first being appraisal prices, the value of homes. Are you confident in the appraisal process if homes are being bought in ways that are not even being tracked?
It's a broad question, and so anyone can jump in.
Thank you very much, Mr. Chair.
Thank you each for coming. As Canadians, we rely on your institutions to give us confidence that the markets are functioning effectively, and as parliamentarians and policy-makers we rely on the evidence you provide to help us make sure that our policies are going to help make the economy better, not worse.
When Mr. Sorbara asked what you think the number one risk is, I disagreed with some of the things that were put forward. I hope you can convince me that my concern about the number one risk is wrong.
My concern is about the aging demographic of baby boomers. They have been holding onto their mortgages longer through the use of reverse mortgages and tightening supply in the housing market with those tools, driving home prices up as a result of that tightening of supply. Then, of course, as they all pass on with higher levels of debt associated with their homes, they're going to release all that supply back into the market very quickly over a 20-year span, starting very soon.
The number of people aged zero to 20 is about 7.9 million. The number of people in Canada aged 50 to 70 is 9.64 million. You'll see this extra supply of housing as those people move out and the new generation coming in to take the supply is not enough—and I'll leave immigration aside for a second. This new intergenerational problem we have is that these mortgages or these homes that are being released back into the supply are coming in with large amounts of debt associated with them, which is not the same as in previous generations.
Mr. Leduc, when you say that you've conducted model simulations to analyze the effects of such a shock and found that the buffers in the Canadian financial system would be sufficient to absorb its impact, you're talking about your view that unemployment rates, coupled with increased debt and then a rise in interest rates, is your number one concern.
Can you just give me some comfort that you've actually analyzed the situation that I've laid out, that it's not a bigger risk than the one you've raised, that you've modelled my concern?
I would like to come back to a few things that have been mentioned, including by Mr. Liepert, and also to discuss demography.
The measures announced and taken by the Department of Finance generally affect demand. We are trying to decrease demand, and the growth in demand is caused by factors x, y, and z. It is often independent of what we or the federal government want.
The problem is that by affecting the demand, we also affect supply. The number of housing starts was mentioned. In Quebec, they feel that there will be a drop of about 10% next year, largely due to measures taken by the federal government. And there is the demographic aspect, as well. A growing number of houses are being put on the market and, therefore, new house starts aren't needed.
How can the federal government have a real effect, if any, on demand, especially when the situation is different from province to province?
This leads me to a second question, which I'll ask at the same time. As MPs, we like to give power to the federal government. However, wouldn't it be possible to give more power to the provincial governments, since the reality of the provinces, or at least of the regions, is different?
The measures taken by the federal government can be positive for some sectors and extremely negative for others. Why couldn't the federal government encourage the provinces and even help them deal with their specific realities?
The question is for anyone who wants to respond, but it is specifically for the representatives from the Bank of Canada and CMHC.
In fact, the first question is whether there is a way to change demand without altering supply, otherwise the two measures are likely to cancel each other out. The second question is whether it would be desirable for the federal government, instead of acting directly in the marketplace, to assist the provinces so they can act in their respective markets.
I have a couple of follow-up comments. When we look at the Canadian housing market, one of the really good things is that about 40% of homeowners don't have a mortgage. The last time I looked, the numbers in my riding were 37%.
The other thing is that our interest expenses are tax deductible as they are south of the border, which encourages Canadians to pay down their mortgage as quickly as possible.
Another great thing in Canada is that we have about 100,000 new folks who want to live, work, study, raise a family in the greater Toronto area. The downside is that we have a housing market imbalance where the supply of new housing takes a very long time to come to market, whether it's due to municipal rules or to land zoning issues that have come down from the province onto municipalities.
Demographics support housing growth because so many new folks are coming in, whether they're immigrants or just people moving from different areas of Canada. We've now put in some measures.
If you want to go back to 2008 or if you just want to comment for now, with the new measures that have been introduced, what anecdotally are you seeing for consumers? What are you seeing on choice, competition, and from my perspective, liquidity in the Canadian mortgage market? I think those are things that we need to consider. The BOC forecasts that housing will have a negative impact on growth of GDP of 0.3% for next year. There may be tail risk on that, if I can use the word on that side.
I'm curious to see your early anecdotal evidence or data that you've seen from the housing market changes. If you want to go back to the 15 changes or just go back to those from October, what have the individual organizations seen on that front?
When the province decides to put in a foreign-buyers' tax that technically gives the power to the City of Vancouver through their charter to be able to charge a foreign national, and then suddenly the Department of Finance or the minister puts down these new rules and could perhaps, as some people thought, cause a huge shock to that area, is that not getting ahead of ourselves? But I digress.
There was some discussion earlier, Mr. Chair, on concerns about consumer debt. I do know, and I have seen many ads that shock me, of some people buying very expensive vehicles on very extended, long-term payment arrangements. You're concerned about that, but we also have here in Ottawa a government that's adding payroll taxes, carbon taxes, and is making it more difficult for people to be able to get a home from which they can actually save money in the form of equity. We all know our homes are our biggest source of equity.
I find it interesting that you're all concerned about consumer debt and the ability to be able to afford a mortgage. I guess maybe this comes back to your point that you just offer a slice of advice to the person in the chair who makes the decisions. I just find it dumbfounding sometimes that we criticize other levels of government for doing things, and yet we often do these things ourselves.
Anyway, it's been a very useful conversation, at least to me.
I'd like to go back, though, to mortgages. We talked a little about this earlier. I said that I was worried about the competitiveness of the industry, particularly what monoline lenders are suggesting. I'm going to read this and I'd like to hear your comments, ma'am, and perhaps those of anyone else:
|| The federal government backs 100% of the mortgage insurance obligations of CMHC, a unique approach compared to other nations. A lender risk-sharing program would raise the risk associated with funding mortgage[s] and increase the capital lenders require. Once again, while the banks are sufficiently capitalized to retain loans on their books, smaller lenders are not, and thus would need to increase mortgage lending rates to offset additional risk, thus increasing costs to consumers. Additionally, as monoline lenders, who are unable to raise sufficient capital close their doors or merge with others to remain in the market, there will be less competition among lenders, thus increasing rates and costs for borrowers....
|| From a consumer perspective, the net effect again would be that housing become[s] less affordable, not more affordable. In our view, this is unnecessary given Canada's low default rate of circa 0.28% and the fact that CMHC has more than enough in reserves to cover outstanding mortgages in the unlikely event of a major rise in defaults.
To me, this seems to say that if we continue this, first of all you're going to have Canadians who cannot refinance. They're going to be shocked to find that out. You're going to see the market becoming far less competitive and overall prices going up. Isn't that the opposite of what we want to see? Can you explain to me the positive side of this policy?
Thank you very much, Mr. Easter.
Good evening, everyone. We would like to thank the committee for the opportunity to contribute to its study on the Canadian real estate market and home ownership. The Canadian Bankers Association works on behalf of 59 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada and their 280,000 employees.
Accompanying me today is Robert Hogue, a senior economist at the Royal Bank of Canada. As you may know, Robert is one of the leading experts on the Canadian housing market.
At the outset I should note that, as has been widely discussed even today, there is not one single housing market in this country but rather several different markets across the country impacted by a range of supply and demand factors that affect housing prices. One factor common to all these markets is the historically low interests rates. Of course there are other more local factors, such as the city or region's attractiveness as a place to live and work, land use and zoning restrictions, the relative availability of certain housing types, and population and job growth.
For instance, Vancouver and Toronto have seen growing housing prices over the past few years. Meanwhile, oil-producing regions have seen either declining or negligible housing price growth. In the rest of the country, we have seen housing prices grow more moderately. Accordingly, when developing housing policies and regulations, it's important to account for the variability that characterizes these housing markets.
As the committee is well aware, the federal government has introduced a number of changes to Canada's mortgage and housing markets over the last several years. For example, on insured mortgages, the government has reduced the maximum amortization period, increased minimum down payments, and implemented more rigorous stress testing.
We understand and support the federal government's objective of maintaining stability in the Canadian real estate market in all parts of the country. Given that the impact of some of these changes has yet to fully materialize, we believe it would be prudent to wait and assess the impact of recent changes before contemplating any additional new measures. Canadian banks have a strong track record of careful, prudent mortgage lending. Moreover, the vast majority of Canadians are responsible borrowers who use credit wisely. This is evidenced by the performance of banks' mortgage portfolios before, during, and after the global financial crisis.
The CBA closely monitors mortgages-in-arrears statistics. A mortgage is classified as being in arrears when the borrower is 90 days behind on their payments. Currently the Canadian mortgages-in-arrears rate sits at 0.28%, which is close to the low rate prior to the global financial crisis. The rate in Canada during the global financial crisis peaked at 0.45%. By way of comparison, the arrears rate in the United States during the crisis peaked at above 5%, more than eleven times the Canadian rate.
Since the 1990s the rate in Canada has never climbed greater than 0.65%. That's over two decades of stability, in times of both high and low unemployment, fluctuating interests rates, and a fluctuating Canadian dollar. Canadian banks have a solid mortgage lending record, rooted in high underwriting standards that have only strengthened since the financial crisis. Whether a mortgage is insured or uninsured, banks apply the same prudent application and underwriting processes.
Banks are rigorous in the origination of new mortgages, including the verification of a borrower's identity, employment status, income, and credit history. Furthermore, in making a decision to extend the mortgage, banks take as paramount a borrower's demonstrated willingness and capacity to make debt payments on a timely basis.
Canada's banks also undertake rigorous stress testing to ensure that Canadians can pay off their mortgages during changing economic conditions. This includes requiring potential borrowers to qualify at higher interest rates to ensure that they are able to make future payments under higher interest rate conditions. It is also important to note that the Office of the Superintendent of Financial Institutions plays an important supervisory function over bank underwriting practices.
In closing, banks take seriously the role they play along with governments, regulators, and Canadian borrowers in ensuring that the Canadian mortgage and housing market remains stable and sound.
I would like to thank the committee again for this opportunity to provide the banking industry's perspective on Canada's real estate markets. We would be happy to answer your questions.
Thank you, Mr. Chair, for the opportunity to speak to the committee today to discuss home ownership in Canada.
As many of you may know, the Canadian Housing and Renewal Association represents the interests of the social, affordable, and non-profit housing sector in Canada.
When most of us think of home affordability and ownership we of course tend to think of the private market. Many of us have followed this traditional path towards home ownership, which includes entry into the rental market, saving for that first down payment, taking on a mortgage, refinancing, and, for the lucky of us, maybe paying off the mortgage. Although this path has been made more difficult with housing prices that have generally exceeded inflation over the past few years, we know that based on CMHC's fourth quarter 2016 report that MLS sales in 2016 will exceed 2015, demonstrating that this traditional path to home ownership remains viable.
However, I would ask the committee to consider the path to home ownership from different and non-traditional perspectives, where the social and non-profit housing sector and social enterprise would play a leading role.
As we all know, the traditional route to property is simply not a possible scenario for many Canadians. Even saving the down payment is out of reach for many low-income Canadians.
Within the social and non-profit housing sector there are models that seek to encourage and lead to home ownership. The Habitat for Humanity model is one example where sweat equity acts as a form of down payment. There are also innovative social housing models where the housing organization or provider provides financial literacy programs as well as matching incentives for families who save and build their assets in escrow. This pool of capital can then be used by households for such investments as a down payment.
There are also models such as the Attainable Homes Calgary Corp., which is a city-owned corporation that enables first-time buyers to buy with a down payment of as little as $2,000. This corporation works with builders, developers, lenders, and others, in order to bring down the upfront costs of ownership to deliver entry-level homes. As another example, there's the Trillium Housing social enterprise model, or the Options for Homes model, both in Toronto, which are non-profit housing organizations that employ a “pay it forward” model, where the non-profit provider co-invests with the homeowner by taking out a second mortgage on a property. Costs are kept down by partnerships with local suppliers, no payments on the second mortgage are required until the unit is sold or rented out, and the price appreciation covers the difference. In Toronto, the Options for Homes model has helped about 3,500 households enter the home ownership market when they otherwise wouldn't have been able to.
So what can the federal government do to encourage and promote some of these non-traditional routes or models of home ownership, and reduce inequity?
In general, we are saying that in the forthcoming national housing strategy, the federal government needs to focus on the needs of Canada's most vulnerable populations to better address gaps in terms of fairness. In our brief on the national housing strategy, we made 24 recommendations on how the federal government could do that. I would be happy to share a copy of that brief. However, for the purposes of the committee's mandate, as specific policy measures to strengthen the capacity of the social housing sector to encourage home ownership, we suggest the following three.
Very quickly, first, follow through on 's mandate letter directive to make surplus federal lands available for social and non-profit housing purposes. Enactment of such a policy would cover a significant capital expenditure for social housing providers. CHRA has recommended vastly expanding the already existing surplus federal real property for homelessness initiative to enact this policy.
Second, introduce a social housing sector transformation initiative that would provide social housing providers with relatively small amounts of capital to introduce innovative programs such as the Trillium Housing or Attainable Homes Calgary model. This is especially important in light of the end of operating agreements that thousands of social housing providers are already facing.
Lastly, in fact we saw this in your first round of questions, there is a need for better research and collection of domestic and international best practices on the interconnections within the housing spectrum. By researching and disseminating information on housing policies and models that work, we can facilitate the move to ownership. In our submission to the national housing strategy, CHRA has recommended the creation of what we call a housing research hub similar to the Canadian Institutes of Health Research, that would, among other things, conduct and disseminate world-class research on housing policies.
The road to home ownership is traversed in a lot of different ways. If we want housing policy that meets the needs of all Canadians, not just those with the greatest incomes, we need to think holistically and creatively to ensure that ownership is a dream that all Canadians can access. The social and non-profit housing sector is here to help make that happen.
Thank you, Mr. Chair.
The Canadian Credit Union Association welcomes the opportunity to brief you in relation to the Canadian housing market. Our comments focus on recent regulatory developments and the government's proposed mortgage insurance risk-sharing framework. Our message to this committee is two-fold.
Credit unions believe, much like the CBA, that it is time for a pause and review. The myriad regulatory measures that have targeted the housing finance market and mortgage insurance over these last number of years have created a situation where consumers and associations such as ours need to take a step back to really understand the objectives of the government, and particularly what the impact of these measures on first-time homebuyers and those in rural and remote regions really looks like. It's not clear to us that the government has allowed itself that opportunity.
CCUA does not support the government's proposal to introduce a mortgage insurance risk-sharing framework for lenders. In our view, there is no strong empirical justification for introducing the framework, and the models will likely exacerbate mortgage price and availability issues for first-time homebuyers and for Canadians living in rural and remote regions.
Since the financial crisis, the federal government has announced at least 15 housing finance-related measures aimed at addressing household debt vulnerabilities, housing price pressures, and managing government exposure. These cascading measures have produced a secular decline in the rate of mortgage origination in Canada since 2008, with the rate falling from a peak of around 13% to its current value of around 6%.
The recent changes to high-ratio and low-ratio insured mortgage underwriting requirements are still working their way through the market. Observers, including ourselves, expect them to exert a significant downward impact on market activity.
A CCUA survey of credit unions indicates that, if the rules announced in late 2016 had been in place on January 1, 2016, high-ratio mortgage volumes, on average, could have been down by nearly 37% last year.
The largest impacts are in B.C.'s Lower Mainland, with potential denials of high-ratio mortgage applications ranging from 35% to 69.5%, depending on the credit union. The second-largest projected impact would be in the GTA with potential denials of high-ratio mortgage applications ranging from 22% to 50.7%. In Alberta we saw ranges from 13% to 46.4%.
Based on 2016 approvals, our survey suggested that first-time homebuyer approvals could be down nearly 20%.
We also expect significant declines in rural and remote Canada. Tougher qualifying requirements for low-ratio transactional mortgage insurance would have made the product unavailable to nearly 50% of qualified borrowers based on our 2016 data. Low-ratio transactional insurance is often used by credit unions in rural and remote areas to give the lender greater protection in the event the home cannot be easily sold in a liquid market. It appears that mortgage credit in these areas will be less available or come at a higher cost.
We stress that these are estimated impacts based on credit union 2016 approvals. Of course, people may choose to delay buying or buy smaller homes, and the bank of mom and dad may contribute further to a down payment. That said, we believe that when the spring buying season commences, these measures will have a significant impact on the market, whether it be urban or rural, with high or low growth.
Tightening mortgage insurance eligibility requirements also impacts the competitive balance in the financial sector. New eligibility requirements have reduced the pool of mortgages eligible for insurance. This hits the mortgage funding side because these insured mortgages can be securitized. This is a concern for credit unions that have been involved in securitizing mortgages to help fund growth across the country.
This funding channel has now been significantly curtailed and this forces credit unions to fall back on deposits and retain earnings to fund growth. Meanwhile, large banks are able to attract funding through other channels not available to co-operatively-owned credit unions. Inadvertently, these new rules have tilted the competitive balance towards the already dominant banks.
In our ongoing policy dialogue with the Department of Finance—and congratulations on your appointment as the new parliamentary secretary—we have recommended that it is time for the federal government to pause and review the impact previous measures are having on the market. We reiterate that recommendation today. Officials must consider whether, from a policy perspective, the impacts on first-time homebuyers, rural and remote regions, and the competitive balance in the financial sector are necessary, desirable, and well calibrated.
CCUA would welcome such an ongoing dialogue.
In late October 2016, the Department of Finance announced it would be consulting Canadians and stakeholders in relation to implementing a risk-sharing mortgage insurance framework. The proposals envision a significant departure from Canada's current practices.
Currently, many regulated lenders are required to transfer mortgage risk to mortgage insurers and indirectly to the federal government's guarantee of mortgage insurer obligations. Borrowers pay premiums to obtain this blanket coverage, and lenders can also choose to transfer risks on other mortgages that they elect to insure. Lenders pay premiums on those mortgages. It should also be noted that these lenders can see insurance claims denied if they do not meet underwriting standards set by mortgage insurers and the government.
The risk-sharing proposals would see lenders accept more losses associated with defaulting mortgages and make more of their capital available to cover these losses. Lenders would be exposed to loan losses in both a normal loss situation as well as in extreme loss events. Policy-makers expect that this prospect of losses will further discipline lender risk management practices and result in a tightening of lending criteria.
CCUA acknowledges the federal government's theoretical rationale behind their risk-sharing proposals; however, we don't believe that a strong empirical argument has been made to date for these proposals. To elaborate, the logic underlying the government's proposals suggests that incentives exist that promote risky lending because lenders can use mortgage insurance to off-load the risk associated with mortgage lending.
However, we have not been presented with evidence that illustrates this happening. In fact, CMHC numbers suggest that arrears on insured mortgages are incredibly low. Between 2010 and 2015, the 90-day arrears rate on insured mortgages averaged 0.36%. As of September 30, 2016, arrears on mortgages in the CMHC's National Housing Act mortgage-backed securities program sat at 0.2% for federally regulated institutions and 0.13% for provincial institutions, including credit unions. These numbers hardly suggest lax insured mortgage underwriting practices in Canada. While this lack of supporting data should give the federal government pause before implementing their risk-sharing proposals, there are other issues that should also be considered.
These remarks that I have just given have noted concerns about mortgage credit for first-time homebuyers and those living in rural and remote regions. In our view, the introduction of risk sharing will exacerbate the challenges already faced by those consumers. Lenders will respond by increased capital provisioning to offset anticipated losses, reduce lending as a result, and increase the cost of credit to demographics and regions perceived to be higher risk yet also very much in need of mortgage credit. It is also possible that insurers will increasingly calibrate premiums to assessment of local markets and the concentration risk of the lender that the insurer now has exposure to. This could further increase mortgage costs in rural and remote regions and negatively impact small local lenders.
Of course, these developments are a particular concern to credit unions that often service rural and remote regions and with a membership that will face these practical consequences.
Thank you for your time.
We welcome your questions.
Good evening. Thank you, Mr. Chair.
Genworth Canada is this country's largest private-sector mortgage insurer, with about 30% market share, and CMHC's largest competitor. The insurance we provide reimburses lenders for their losses when homebuyers default. Mortgage insurance is mandatory for homebuyers who put down less than 20%, and thus we serve primarily first-time homebuyers.
With insurers taking default risk, lenders are able to offer first-timer buyers competitive interest rates and to have confidence to do so across Canada and throughout economic cycles. We're housing-risk aggregators with specialized expertise. We're well capitalized, tightly regulated, and deeply experienced to properly manage mortgage-related risks.
Regarding the topic of mortgage rule changes, I will speak to two key points tonight.
First, the government has made numerous changes in the insured-mortgage segment over the past couple of years, some with impacts yet to be felt. To avoid a potential tipping point, it's critical that we take a pause and assess the cumulative impact prior to considering any additional changes, including the current risk-sharing proposal.
Second, the changes to date have largely targeted aspiring first-time homebuyers, making it harder for them to gain a foothold in the housing market today. Home ownership and the opportunity to build equity through the forced savings mechanism of a mortgage payment is an important cornerstone of the financial plan for many young families. We believe they aren't the problem and that further targeting of this segment is not the best solution.
Insured first-timers are the most tightly regulated and rigorously underwritten borrowers in the market today. These buyers reside in all regions across Canada, range in age from 25 to 40, and typically demonstrate stable employment, with average household incomes of $80,000 to $100,000. They buy homes they can afford, often below market averages, especially in Toronto and Vancouver. Their credit scores reflect fiscally prudent responsible borrowers, averaging a score of 752 last year.
Canada's mortgage finance system is a proven model. The rest of the world views our mortgage insurance structure as a best practice and a key contributor to our mortgage finance stability. During the global financial crisis, U.S. delinquencies rose above 5%. By contrast, Genworth's worst vintage year to date is 2007, which peaked in 2009 at 0.95%.
Our submission highlights nearly two dozen federal interventions since 2008, primarily targeting the insured market and first-time buyers. While many of these changes have contributed to the overall strength of our mortgage finance system, some may have gone too far. The most recent changes, last October, for example, are significant, the impacts of which are yet to be fully observed. I can't stress enough that it's going to take time before we know their total cumulative effect on the market.
We believe implementing any more changes could tip the market too far, creating the kinds of housing challenges these measures seek to prevent and hurting new buyers, existing homeowners, and the broader economy in the process.
Let me address the last two changes specifically.
In December 2015 the government increased minimum down payments on homes selling over $500,000. While targeting the strong Toronto and Vancouver markets, these changes had an impact on other markets too. Calgary, in particular, was hit quite hard, with approximately 12% of insured buyers affected by the change. As you know, this market was already under pressure and didn't need any additional cooling. In fact, only 13% of the Toronto and Vancouver buyers were making down payments small enough to be impacted, despite the much higher average price in these regions. Given how little the first-time buyer participates in these two cities, it's not surprising that, despite these and other changes to date, significant home price appreciation in Toronto and Vancouver continued.
National solutions are perhaps ill-suited to address local market challenges. Recently Vancouver's market has started to slow. However, it appears to be driven by a local solution to a local challenge—specifically, foreign buyers.
Last October brought more changes, including an interest rate stress test for insured buyers. While we support the concept of a stress test, we believe the target was set too high. Let me be clear; this was a significant change. Under this new test, approximately one-third of the first-time buyers we approved in 2016 would now be offside.
These buyers face stark choices: buy a less expensive home, perhaps a condo or a home further from work; ask their parents for more money; delay their purchase to save for a larger down payment; or consider a bundled loan from a private lender. It's this last option that should concern us most, pushing first-time buyers into the private lending space, a segment that continues to grow as mortgage insurance rules tighten. This segment represents a higher-cost option, with limited transparency and regulatory oversight.
To conclude, in 2010 the insured market represented approximately 40% of annual originations. With the cumulative changes, it's expected to drop to around 20% this year. Home prices and related mortgage debt are growing the fastest in segments of the market that are not accessible to first-time buyers, yet even though they're not driving the problem, they're the ones absorbing all the consequences, making it even harder for them to access responsible home ownership.
The big question we need to ask is this. What's the cumulative impact of all these changes for home prices, demand, first-time buyers, and the growing unregulated sector?
What should the government do? In our view, take a pause. Study the impact of all the changes made to date before considering any more. Second, if after that study it is deemed that more change should be considered, modify the stress test to better reflect future rate expectations. Third, given the number of potentially damaging consequences, do not proceed with a risk-sharing model. Finally, continue to work closely with other levels of government to study and address individual housing markets at the regional level.
Thank you for your attention to these issues. We're happy to take any questions you might have.
A witness: No.
Mr. Phil McColeman: Were you consulted?
A witness: No.
Mr. Phil McColeman: Were you consulted?
A witness: No.
Mr. Phil McColeman: So no one in your realm, across the board, was consulted by the on bringing in those changes. Am I correct? Thank you for that.
The realtors weren't consulted, by the way. The Canadian Home Builders' Association was not consulted. We're talking about internal government bureaucratic decisions that are flowing up from the bureaucrats, who, in their wisdom, seem to see how they need to cool the market. They tell the minister, through the deputy minister, “Oh, here is something we should do to cool these markets.”
Do you think it's going to work? Do you think it's going to work in Brantford? Do you think it's going to work in Simcoe, Ontario? Do you think it's going to work somewhere in Calgary, when the market is going down the tubes? No, it's not. It's only going to harm the market. I like your idea of a pause. I'd rather see a pause and three steps backwards, frankly, to get this market healthy in most of the country and out of the hot market. Those are my personal comments.
Thanks to all of you for being here.
I want to speak to you, Mr. Morrison, because you spoke about social housing and the housing strategy. Often when we're studying these impacts, those low-income earners are a somewhat different issue. One issue is about getting into the market, but the other is about anything that's somewhat affordable and just being able to get there.
I wanted to talk a bit about some of the things you raised. This is of particular interest to me because I tried to fight for a lot of these things when I was in municipal government, but there are a lot of barriers. You mentioned three things in particular that the federal government could do or should do to help. In listening to all three of those, I saw that you still need the provincial and municipal governments, even if, as you proposed, there are federal aspects in the use of social housing. Unless you build only social housing in that area, or if you build only social housing on those lands, that actually goes against a lot of provincial and municipal ideas. One that I hold personally is that you don't build social housing in one area; the community needs to be fully integrated.
The second issue is that you have the municipal and the provincial governments, and if you allocate certain land or certain units to be affordable, how do you ensure.... First of all, our definitions of affordable are very different. I know that in Ontario from the municipal side our definition of “affordable” is way off kilter. Also, then, what do you do if you actually have an affordable unit?
Let's say the federal government makes some recommendations, you have an affordable unit, and that person sells. That's now on the open market. How do you not lose those affordable units? What regulation or legislation would you like to see? Even though the federal government can impose on other tiers of government in terms of housing, they must necessarily deal with this. How would we work with other levels to ensure that it trickles all the way down and we keep those affordable units?
Before I answer, I want to say, on behalf of CHRA, that our hearts and prayers go out to the victims of the Quebec situation yesterday.
You raised a number of excellent points, and we would agree with what you've said. One of the things we were very heartened to see, with respect to the national housing strategy that is currently leading, is the very strong engagement he has had with provincial, territorial, and municipal governments.
I was fortunate a week and a half ago to present before the big city mayors' caucus, right after the . The mayors have made investment in and policy regarding affordable housing a top priority. Their commitment to the Prime Minister was to work very closely to align federal policy with municipal policy, and we know that provincial governments have said the same.
In terms of what federal levers are present, I did mention the three. Those were three out of 24 recommendations that we had provided in keeping with the scope of this particular study today. We wanted to keep the focus on social housing serving as a sort of platform or springboard for folks who want to move into the ownership space.
What we currently have is essentially operating agreements that mandate providers to maintain a certain number of units at what we call RGI, within an RGI framework—a rent-geared-to-income framework. With respect to the new policy framework that the national housing strategy will build upon, we want to make sure that the maintenance of existing units is protected, using whichever mechanisms are introduced and ideally, of course, to see that market grow, because as we all know, especially with regard to the Toronto area, wait-lists for social housing have grown significantly.
So, yes, there needs to be a maintenance and protection of what we have, and we need to grow what we have, using various.... I think the mayors have said they want to work with the federal government to do just that.
With regard to the credit unions, I grew up in northern British Columbia with Northern Savings Credit Union, a very local credit institution. We had the big banks there as well, which I later worked at for a number of years, and they were big participants in our local community organization.
I've heard a number of comments on the changes that were made in October and also a number of comments on risk sharing. I think risk-sharing credit unions, because they tend to operate in small rural towns, less-served areas versus urban areas, could have an impact potentially on rates for those customers in those areas, because in areas of Canada where economic growth maybe isn't as robust as, say, Toronto, you'll no longer have that cross-subsidization. You could have the impact on a first-time homebuyer in northern Manitoba and other areas—say, northern Ontario or Quebec—paying 30 or 40 or 50 basis points more than in other areas.
But there's one area that I think we also need to touch on, and this is my question for you. When a mortgage is in arrears, there's a large incentive for the insurers to work with the banks to keep the homeowner in the house. With risk sharing, I believe those dynamics change.
I'll go over to the credit union. I want you to comment on the competitive landscape and what you'd like to see going forward.
I'm sorry, but I will answer in English.
I think the challenge with a federal government department playing this enhanced role is that it may not have the mechanisms to bring together the wide array of stakeholders that would be necessary and beneficial in that kind of forum. If you were, for example, to have a StatsCan-run body, that may not allow for the active participation of the provinces, of municipalities, of territories, or of the other research hubs and organizations that currently exist.
In addition, I think one of the things that we hope to see out of the national housing strategy is that, as a means of measuring the impact that the strategy has, the federal, provincial, territorial, and possibly municipal governments will establish a series of indicators and measures. This way, we will know year over year whether the goals and objectives of the strategy are actually being met. To do that, there would need to be some form of an intergovernmental component to that research body. Whether a federal stand-alone department or organization, such as StatsCan for example, could do that is questionable.
Again, we've looked at some different models, both international and even domestic, that could serve that purpose.